2Capacity PlanningCapacity is the upper limit or ceiling on the load that an operating unit can handle.The basic questions in capacity handling are:What kind of capacity is needed?How much is needed?When is it needed?
3Importance of Capacity Decisions Impacts ability to meet future demandsAffects operating costsMajor determinant of initial costsInvolves long-term commitmentAffects competitivenessAffects ease of management
4Various Capacities Design capacity Maximum obtainable outputEffective capacity, expected variationsMaximum capacity subject to planned and expected variations such as maintenance, coffee breaks, scheduling conflicts.Actual output, unexpected variations and demandRate of output actually achieved--cannot exceed effective capacity. It is subject to random disruptions: machine break down, absenteeism, material shortages and most importantly the demand.
5Efficiency and Utilization Actual outputEfficiency =Effective capacityUtilization =Design capacityThis definition of efficiency is not used very much.Utilization is more important.
6Efficiency/Utilization Example for a Trucking Company Design capacity = 50 trucks/day availableEffective capacity = 40 trucks/day, because 20% of truck capacity goes through planned maintenanceActual output = 36 trucks/day, 3 trucks delayed at maintenance, 1 had a flat tire
7Determinants of Effective Capacity/Output Facilities, layoutProducts or services, product mixes/setupsProcesses, qualityHuman considerations, motivationOperations, scheduling and synchronization problemsSupply Chain factors, material shortagesExternal forces, regulationsCaution: While discussing these the book considers effective capacity almost synonymous to output.
8Some Possible Growth/Decline Patterns VolumeTimeGrowthDeclineCyclicalStableFigure 5-1
9Developing Capacity Alternatives Design flexibility into systems,modular expansionTake a “big picture” approach to capacity changes,hotel rooms, car parks, restaurant seatsDifferentiate new and mature products,pay attention to the life cycle, demand variability vs. discontinuationPrepare to deal with capacity “chunks”,no machine comes in continuous capacitiesAttempt to smooth out capacity requirements,complementary products, subcontractingIdentify the optimal operating level,facility size
10Outsourcing: Make or Buy Outsourcing: Obtaining a good or service from an external providerDecide on outsourcing by consideringAvailable capacityExpertiseQuality considerationsThe nature of demand: StabilityCostRisk: Loss of control over operations with outsourcing; loss of know-how. Loss of revenue.
11Evaluating Alternatives: Facility Size Production units have an optimal rate of output for minimal cost.MinimumcostAverage cost per unitRate of output
12Evaluating Alternatives: Facility Size Minimum cost & optimal operating rate arefunctions of size of production unit.Average cost per unitSmallplantMediumLargeOutput rate
13Planning Service Capacity Need to be near customersCapacity and location are closely tiedInability to store servicesCapacity must me matched with timing of demandDegree of volatility of demandPeak demand periods
18Break-Even Problem with Multiple Fixed Costs FC + VC = TCFC + VC = TC3 machinesFC + VC = TC2 machines1 machineQuantityFixed costs and variable costs.Thick lines are fixed costs.
19Break-Even Problem with Step Fixed Costs QuantityTCStep fixed costs and variable costs.TRNo breakeven pointsin this rangeBreak even points.
20Cost-Volume(Break-even) Analysis Break-even quantity: Level of production that equates total costs to total revenuesAssumptions:One product is involvedEverything produced can be soldVariable cost per unit is the same with volumeFixed costs do not change with volumeRevenue per unit constant with volumeRevenue per unit exceeds variable cost per unit
22product and service design Decision TheoryDecision Theory represents a general approach to decision making which is suitable for a wide range of operations management decisions, including:capacity planningproduct and service designequipmentselectionlocationplanning
23Decision Theory Elements A set of possible future conditions (call them scenarios) exists that will have a bearing on the results of the decisionUncertain scenariosA list of alternatives for the manager to choose fromA known payoff for each alternative under each possible future condition
24Payoff Table Input or implied by the problem set up Possible future demandAlternativesLowModerateHighSmall facility$10$10$10Medium facility$7$12$12Large facility$-4$2$16Present value in $ millions.This payoff table is given as an input.
25Decision Making under Uncertainty When maximizing an objective:MaxiMin - Choose the alternative which has the maximum of minimum possible payoffs for each alternative. Conservative strategy because tries to make the best of the worst possible outcome (for each decision). Which facility?MaxiMax - Choose the alternative with the largest possible payoff. Radical strategy. Which facility?Average(Laplace) - Choose the alternative with the best average payoff of any of the alternatives. Which facility?
26Decision Making under Uncertainty When minimizing an objective: Say cost.MiniMax - Choose the alternative which has the minimum of the maximum possible costs for each alternative. Conservative strategy.MiniMin - Choose the alternative with the least possible cost. Radical strategy.Average(Laplace) - Choose the alternative with the minimum average cost of any of the alternatives.Average cost may not be a good indicator. Some alternatives may have more risk than others. In that case, it is ok to choose a slightly costly alternative with low risk.
27Example: Hyatt at the Airport “some time ago” Construct the payoff matrix Airport location Las ColinasAirport LocationRichardsonPurchase Price$18$12PV of hotel if airport is built here$31$23PV of hotel if airport is built at the other location$6$4
28Payoff Matrix for MaxiMax, MaxiMin Airport locationLas ColinasAirport location RichardsonBuy Las Colinas$13-$12Buy Richardson-$8$11Buy Both$5-$1Buy None$0
29Regret: What I have done against what I could have done. MiniMax Regret. Airport location Las ColinasAirport location RichardsonBuy Las Colinas$0=no regret$23Buy Richardson$21Buy Both$8$12Buy None$13$11
30SummaryCapacity typesEfficiency, utilizationBreak-even analysisDecision Theory (decision making under uncertainty)